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Why Freeport Isn’t Constructing a Smelter in Indonesia

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Smelter in Indonesia

Earlier this year, Freeport-McMoRan’s (FCX) export permit in Indonesia was suspended, which the company acknowledged in its 4Q15 earnings call. Also, it was reported that the Indonesia government wants Freeport to deposit $530 million into an escrow account for the construction of the smelter in the country.

We should note that the Grasberg mine is one of Freeport’s crown jewels. The Grasberg mine will be key to Freeport reducing its unit cash costs this year. Most of the expected reductions in unit cash costs seem to be coming from the Grasberg mine where Freeport expects its unit cash costs after by-product credits to average only $0.12 per pound in 2016, a fall from $1.09 per pound in 2015.

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Why Freeport isn’t relenting

Construction of a smelter in Indonesia to process copper ore has been a key point of contention between the Indonesian government and Freeport. Building a smelter shouldn’t be a big asking for Freeport given the scale and importance of its Indonesia operations. However, Freeport has linked smelter construction to its contract renewal post-2021.

As discussed previously, Freeport-McMoRan needs to sign an amended contract of works with the Indonesian government (EIDO). Freeport needs assurance from the government to go ahead with its planned investments at Grasberg. In the next part of the series, we’ll discuss how this is impacting Freeport’s Indonesia operations.

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